Theory & Methods: Bayesian variable selection in logistic regression: predicting company earnings direction

This paper presents a Bayesian technique for the estimation of a logistic regression model including variable selection. As in Ou & Penman (1989), the model is used to predict the direction of company earnings, one year ahead, from a large set of accounting variables from financial statements. To estimate the model, the paper presents a Markov chain Monte Carlo sampling scheme that includes the variable selection technique of Smith & Kohn (1996) and the non‐Gaussian estimation method of Mira & Tierney (2001). The technique is applied to data for companies in the United States and Australia. The results obtained compare favourably to the technique used by Ou & Penman (1989) for both regions.